Current Economic Statistics and Review For the Week 
Ended September 24, 2005 (39^th Weekly Report of 2005)

I

Theme of the week:

Derivatives Market in India*

Concerns About the Structure

 Background 

In 1969, the central government had prohibited all forward trading in securities in order to curb certain unhealthy trends that had developed in the securities market at that time and to prevent undesirable speculation. However, in the changed financial environment in the post-liberalisation period, the relevance of this prohibition had vastly reduced. Despite the withdrawal of prohibition on derivatives by the Securities Laws (Amendment) Act, 1995, the market for derivatives did not takeoff for some years, as there was no regulatory framework to govern trading in derivatives.

The pros and cons of introducing derivatives trading were debated intensely in the mid-1990s. The lack of transparency and inadequate infrastructure of the Indian stock markets were cited as reasons to avoid derivatives trading. Derivatives were also considered risky for retail investors because of their poor knowledge about intricacies of such trading. However, in spite of the opposition, the path for derivatives trading was cleared by the authorities.

 In December 1999, the Securities Contract (Regulation) Act [SC(R)A] was amended to include derivatives within the ambit of ‘securities’ and a regulatory framework was developed for governing the trading in derivatives. Derivatives were formally defined to include: (a) a security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security, and (b) a contract which derives its value from the prices, or index of prices, or underlying securities. The Act also made it clear that derivatives are legal and valid, but only if such contracts are traded on a recognised stock exchange. The Government also rescinded in March 2000 the three-decade old notification, which prohibited forward trading in securities.

Earlier, SEBI has set up a 24-member Committee under the Chairmanship of Dr. L. C. Gupta on 18 November 1996 to develop an appropriate regulatory framework for derivatives trading in India . The Committee submitted its report on March 17, 1998. The introduction of derivatives was delayed for some more time as the infrastructure for it had to be set up. Derivatives trading required a computer-based trading system, a depository and a clearinghouse facility. In addition, problems such as low market capitalisation of the Indian stock markets, the small number of institutional players and the absence of a regulatory framework caused further delays. Derivatives trading eventually started in June 2000.

 On June 9, 2000, the Bombay Stock Exchange (BSE) introduced India 's first derivative instrument - the BSE- (Sensex) index futures. It was introduced with three-month trading cycle - the near month (one), the next month (two) and the far month (three). The National Stock Exchange (NSE) followed a few days later, by launching the S&P CNX Nifty index futures on June 12, 2000.

 A brief status report on derivatives

 Derivative trading is permitted only on two exchanges, viz., BSE and NSE. While turnover in interest rate derivatives is miniscule, the bulk of the volume is in equity-based derivatives. The total derivatives turnover has increased from Rs 103,847 crore in 2001-2 to Rs 2,563,165 crore in 2004-05. In the financial year 2005-06 so far, the total turnover has risen from Rs 195,972 crore in April 2005 to Rs 308,166 crore in July 2005 (Table 1)  

As shown in Table 1, BSE has not been able to sustain the investors’ interest despite making various efforts, while the derivatives segment has grown exponentially on NSE.

Product-wise distribution of turnover

Though the trading in derivatives began on NSE in June 2000 with the introduction of index futures followed by index options in June 2001 and stock options in July 2001,  the total derivatives turnover ranged between Rs 35 crore and Rs 5,477 crore  until the introduction of  stock futures in November 2001.

Thereafter, there has been a quantum jump in NSE's derivatives trading to Rs 101,925 crore in 2001-02 (daily average of Rs 410 crore) with stock futures accounting for Rs 51,515 crore or 50 per cent (Chart 1). The total derivatives turnover has increased thereafter manifold over the years; in 2004-05 it has touched Rs 25,46,986 crore (Rs 10,107 crore of daily average) with stock futures trading for Rs 14,84,056 crore or 58.3 per cent. As compared to the trading in stock futures in April –August 2004 at Rs. 485,664 crore, has shot up to Rs 816,557 crore in the comparable period this year - a rise of over 68 per cent. Among the five derivative instruments traded on NSE, stock futures have been the most popular since its inception. It accounts for almost 60 per cent of the total turnover followed by index futures which have ranged between 10 per cent to 30 per cent except in 2000-01 when it was the only derivative instrument traded on the exchange. Except for a brief period in 2003-04, interest rate derivatives have not been traded.

Role of retail investors

The profile of participants operating in the derivatives markets shows that the participation of retail investors is much more than that of institutional investors. As per the data published by NSE, among the different classes of investors, the bulk of trading is done by retail traders. They account for about 60 per cent of gross traded value followed by proprietary trades and by institutional investors (Table 2). In case of futures, an investor is required to pay an up-front margin on the basis of exposure taken. As a result, they can hold large position and manage large exposures.

The mix of hedging and speculative demand is critical for a successful market. It is relatively easy to stimulate speculative demand – practically all markets have a natural class of intermediaries whose main purpose is short-term trading and who are interested in expanding the range of products for speculative trading. It has been observed that natural hedging demand in developing markets is subdued, because many developing markets do not have the institutional investors whose businesses require them to invest for the long-term and manage their risk in the meantime.

Given the fact that most of the retail trading is of speculative in nature, this may raise long-term risks if genuine long-term institutions do not emerge with hedging demands. Also, this raises questions about the role the present derivatives market performance in terms of supporting speculative motives rather than hedging activities, which is the basic rationale for the existence of derivatives market.

Nevertheless, in terms of building the market infrastructure, retailers' involvement has supported the growth. But, for serving a more meaningful role, it is pertinent that institutions are using them to hedge their positions. Recently, Sebi has relaxed the restrictions on mutual funds to trade in derivatives on par with those for FIIs

Indian financial markets are already considered to be speculative, as the percentage of deliveries to the total cash turnover has hovered around 20 per cent. However, recently, the percentage seems to be rising to around 25 per cent. In addition, the leveraged nature of the futures market makes stock futures very attractive for speculators. The most probable reason cited for the success of stock futures in India and huge retail participation in it, lies in the similarity between the trading of stock futures and the time-worn badla system. In fact, stock futures are better than badla as the returns on the latter are decided on a weekly basis and were prone to adjustments. But, in case of stock futures, cost of carry is known to both the buyers and sellers, at the time of entering into the contract.

Unusual dominance of stock futures

As per the 2004 IOMA[1] Derivatives Market Survey conducted by the World Federation of Exchanges, stock futures are a new development and few exchanges offer them; National Stock Exchange (NSE) of India has been particularly successful in offering stock futures and its notional value represents nearly 4/5^th of the aggregate global stock futures as of 2003. The survey further notes that even in 2004, stock futures are available for trading on only a few exchanges. The two big exchanges, namely, NSE and Russian Trading System (RTS) account for 62 per cent of global volumes. In 2004, NSE had overtaken RTS, making it the largest exchange for trading stock futures. The larger underlying contract value of the Indian stock futures means that the Indian exchange makes up 74 per cent of the notional value of stock futures trading. Also, NSE has accounted for 95 per cent of transaction volumes in stock futures in India . US markets have been slow to adopt stock futures, and the two exchanges that do trade them saw mixed fortunes in 2004 - OneChicago2 volumes increased, and NQLX2 volumes fell. In the European time zone, all exchanges that trade stock options, with the exception of Eurex, have introduced stock futures. They saw mixed results in 2004, with Euronext, JSE South Africa, Borsa Italiana and OMX Stockholm recording significant increases.

 The same survey states that the global derivatives volume has increased from 7.9 billion contracts in 2003 to 8.6 billion contracts in 2004 , 3.2 billion contacts in futures and 5.4 billion contracts in options (Chart 2).  

Merits of Physical Settlement

Physical delivery has its obvious advantages - traders, being wary about the fact that a trade may end in delivery, would exercise more caution especially while taking a short position. In other words, there would be more trading discipline. Besides, it acts as a safeguard against short-term price movements in the underlying asset. For instance, taking physical delivery will guard a market player from any manipulative movement in the stock price just before the expiry of the futures contract.

However, currently all derivative contracts are cash settled. Total settlement value as a percentage of total derivatives turnover has been less than one per cent except in 2000-01. Also, the size of mark-to-market (MTM) exceeds that of final settlement for futures and in case of options, premium settlement exceeds exercise settlement (Table 3). 

Physical delivery will take place only for open positions on the expiry of the contract. Any market participant who has taken a future position and squares off, then any delivery process does not impact him. So speculators are not much affected.

For others, in the cash settlement-based environment, these positions are either rolled forward (squaring off near month future and selling of next month future) or squared off by buying the future and selling the cash-market holding. This leads to additional cost for the arbitrageurs at the time of squaring off. If the settlement is through physical delivery, the arbitrageurs will tender their stock for settlement of the futures position and thus save the cost of squaring off. 

Also, if the cash market is directional and the stock is showing a big move in either direction, the futures price will adjust itself with the expected closing price of the cash market as this will be the settlement price for the futures positions. However, in the physical settlement scenario, this price will lose its relevance for the settlement of derivatives positions and the cash and futures price will move exactly in tandem. If not, there will be an arbitrage opportunity emerging. On the whole, it will reduce volatility in the market during the last half-an-hour of the market on the expiry day.

In case of options, for instance, a call option writer who has to give delivery of shares if the option is exercised with physical settlement, he would prefer writing a covered call rather than rely on the other option of acquiring shares once the option is exercised. So, in essence, there would be fewer uncovered calls being written. There is also the option of borrowing shares for the delivery, but then something needs to be done to make the borrowing and lending mechanism more efficient. The availability of stock lenders and financiers would be imperative for the success of the market in the deliverable environment

The finance ministry has approved physical settlement of derivatives contracts. With physical delivery, the linkages between derivatives and cash markets become stronger, so it makes sense to introduce it now, since the derivatives markets are more mature and liquid. 

However, Sebi and NSE have some serious concerns. They worry that physical settlements increase the possibility of a bear squeeze, especially in scrips where the floating stock is low. In a bull market, the floating stock available on a daily basis shrinks rapidly even though trading volumes on the bourses appear high.  More importantly, the entire point about introducing derivatives trading was to take the speculative element out of the cash segment and separate cash from speculative trades- the arbitrage between cash and derivatives keeps prices true and correct.

The traditional badla trading often led to problems because it was an amalgmation of cash and settlement. The argument that one cannot effectively hedge trades without physical settlement is largely incorrect. Ironically, FIIs who hold large chunks of stocks are probably best placed to take advantage of physical settlement in derivatives. Physical settlement can be introduced only if there is an efficient securities lending and borrowing system.  

In the absence of physical delivery, the system simply flushes out all trades at the end of the month when the contract expires. There is no logical conclusion to the futures trade. The continuous balancing of buy and sell does not happen and the populist view gets further propagated, as the buyer does not have any obligation to take delivery. This implies that there is a support for unidirectional movement of the market. However, experts argue that the deliveries in the derivatives markets are only in the 2- 5 per cent range. It must be understood that this is the result of delivery after the open positions have been squared; hence 98 per cent are countertrades. If we do not provide for these countertrades, there will then be no balancing factor in the market. For those who want to manipulate the market, it is easy to maintain the last day prices so that the square off rates are high/low as desired. If all trades have to logically close, then such manipulations have no place in the market.

The fact that futures prices are at a discount shows that the underlying cash and the futures markets are not in sync and operate in their own orbits. It is well known that the derivatives market has been used to heavily short sell when the going was not good in banking and PSU stocks.

A critique of Cash Settlement

The L. C. Gupta Committee had advocated that stock futures should be introduced only after a system for lending and borrowing of shares was in place. It, therefore, visualised physical exchange of shares for settling the trades executed in the futures market for individual stock futures. Instead of introducing the lending and borrowing system, a detour was adopted and cash settlement insisted upon even for individual stock futures.

The earlier Committee on Secondary Market believed that introducing a share lending and borrowing mechanism would amount to badla. It, therefore, advocated that if stock futures are introduced, they should be cash settled; no lending and borrowing mechanism was thought necessary in such a model.

Here, it is worth noting that Deena Mehta, former President of BSE, has attributed the sharp surge in stock indices partly to the structure of the derivatives market, wherein the absence of physical settlement is allowing investors to hold large positions and rollover the same at the time of deliveries. She further says that the country takes great pride in following international best practices, but the cash settled system is an anachronism. In all developed countries, derivative trades are delivery settled. The danger of a cash settled system is highlighted above. After the experience of five years in the derivatives market, the regulator must look at the issue on hand objectively. The size of derivatives market being bigger than the cash market, we cannot afford a structurally weak system.

The importance is also emphasized by the growth of derivatives market, which has grown exponentially over the years. The total derivatives turnover as a percentage of cash segment has shot up sharply from 0.2 per cent in 2000-01 to 194 per cent in 2003-04 and further to 223 per cent in 2004-05. In 2005-06, it has risen to a high of 251 per cent in July 2005 (Table 4).    

References

Business line (2001) “Volumes soar as single stock ‘futures’ mimic ‘badla’ November 30

Business line (2005): “Is the derivatives market model a weak link?” August 3

World Federation of Exchanges (2005): “2004 IOMA Derivative Market Survey” May

                                                   (2004):“Equity Derivatives and cash trading”, December

NSE: “NSENEWS” Various issues

Gupta. L.C (1998): “L C Gupta Committee report on Derivatives”

(* This note has been prepared by Ms. PIYUSHA HUKERI)

Highlights of  Current Economic Scene

AGRICULTURE   

The Ministry of Textiles plans to set up 25 integrated textile parks within a span of 2 years. The scheme has been introduced in place of the existing schemes, viz. Apparel Park for Exports (APE) and the Textile Cluster Infrastructure Development Scheme (TCIDS). The government is ready to pay 40 per cent of the project cost or up to Rs 40 crore; whichever is less, excluding the cost of the plant and machinery. Once fully operational, the park will facilitate investment worth Rs 7500 crore in sector. The production is expected to touch Rs 20,000 crore per annum. The primary objective of the scheme is to provide world-class production facilities to the players.

The government has asked the states to help in implementation of Rs. 14,839-crore rehabilitation package for ailing rural co-operative banks. The National Commission for Farmers has suggested a paradigm shift from micro finance to livelihood finance. The panel headed by agricultural scientist Dr MS Swaminathan, in its second report formulated a new livelihood concept and called for its implementation through a proposed multi-crore budget. The major recommendations of the panel include:

Setting up of state level farers’ commission to conduct censes of farmers’ suicides, finding out the reasons behind it.

Taking into account newer forms of credit, indebtedness in the debt survey.

Revival of all lapsed insurance policies of farmers and setting up of an agri risk fund to cover such calamities.

Strengthening the primary agriculture co-operative societies, which deliver credit ultimately to farmers and offering an incentive to farmers for timely repayment of loans, converting of short-term loans into term-loans as per the need, to improve the recovery of such loans.

A specialised mandi only for trading in onions is being constructed in Rajasthan’s Alwar district. Alwar and its surrounding area is well known for high quality onions. The market will provide huge electronic screens that will flash the live prices of onions across the country’s major markets. The project will cost a total of Rs 25 million. Around 75 shops will be constructed within the market complex.

 The Farm Ministry, along with public sector seed institutions and the private sector seed industry, is working on a National Seed Plan. The plan is likely to be ready by the Rabi season this year, however it can be implemented from the next kharif Season. The plan is aiming at a radical change in the Seed Replacement Ratio (SRR) for major crops and oilseeds by improving the genetic quality of existing seeds. The private sector has suggested controlling the prices of seeds since the farmers cannot afford high priced seed varieties.

 According to Tobacco Board, tobacco exports, in the first quarter of the fiscal year 2005-06 have been recorded at 39,345 tonne worth Rs 313.56 crore. The export includes 35, 030 tonne of unmanufactured tobacco (Rs. 245.01 crore) and 4,315 tonne of tobacco products (Rs. 68.55 crore). Tobacco exports for the fiscal year 2004-2005 stood at 162,933 tonne worth Rs. 1, 362.18 crore.

 According to Cashew Export Promotion Council of India (CEPCI), total production of raw cashew nuts in India has augmented by only 9,000 tonne during 2004-05. The total production in 2004-05 was 544,000 tonne, as compared to 535,000 tonne in 2003-04. During 2004-05, total exports of cashew kernels and other cashew-based products stood at 126,667 tonne, valued at Rs 2717.15 crore compared to the total exports to the tune of 126,667 tonne, valued at Rs. 2709.24 crore. This implies an increase of 25.63 per cent in quantity and 50.14 per cent in value.

INDUSTRY

 Pharmaceuticals

National Pharmaceutical Pricing Authority (NPPA) has announced up to 36 per cent cut in prices of 15 scheduled bulk drugs, which will make available hundreds of popular medicines including multi-vitamin brands, anti-asthmatics, antibiotics, anti-ulcerants, anti-malarials, and skin preparations at a lower cost. In a few days, NPPA is also expected to reduce prices of formulations containing these ingredients, hitting the bottomline of drug companies. Retail ceiling prices of 308 formulations have as well been either cut or fixed for the first time.

 The pharma task force appointed by the prime minister has proposed that the government determine ceiling price for all but 40 of the 354 essential drugs on the basis of a weighted average of the top three brands by value. It suggests essentiality of drug to be the sole criteria for price control and hence argues for no control on prices of bulk drugs and unbranded formulations and also compulsory price negotiation for patented drugs before they are approved for marketing. The report supports halving of excise duty on all drugs from 16 per cent to 8 per cent. The report also proposes a dual regulatory system for pricing and quality of drugs and encouraging R&D by a favourable fiscal regime rather than tampering with the price system.

 SSI

The government has increased the ceiling on loans for small-scale industries to Rs 1 crore from Rs 40 lakhs and the subsidy rates to 15 per cent from 12 per cent, following amendments to the Credit Linked Capital Subsidy Scheme (CLCSS), in an attempt to encourage SSI units to modernise and upgrade technology so as to remain competitive.

INFRASTRUCTURE

 Finance ministry plans to do away with the annual borrowing ceiling for SPV proposed for funding infrastructure projects and allow it to borrow sans any limit, provided it does so on the strength of its own credit worthiness i.e. the government will not guarantee such borrowings. The ministry is simultaneously considering limiting direct lending by the SPV for any single project to Rs 500 crore. Along with the ceiling is a stipulation that the lending by the SPV, including refinancing, would not exceed 20 per cent of the total cost of any single project.

 Energy

Assuming ethanol-blending programme will be implemented in nine states and four union territories originally envisaged, demand for ethanol would be around 750 million litres at 5 per cent blending level with petrol and its double at 10 per cent blending level in 2009-10. Also demand for ethanol by industrial alcohol based chemical manufacturers, potable alcohol manufacturers and such other users is expected to be around 1570 million litres by 2009-10. Thus, a total demand of 2300 million litres at 5 per cent blending level or 3100 million litres at 10 per cent blending level is projected for ethanol by 2009-10.

 Petroleum and Petroleum Products

The government is weighing the option of permitting ONGC, IOC and GAIL to sell their cross-holdings through public offers. IOC holds a 9.6 per cent stake in ONGC, which, in turn, has a 9.1 per cent stake in IOC; GAIL has a 22.4 per cent stake in ONGC, while ONGC and IOC own 4.8 per cent each in GAIL. The sale of cross holdings will provide relief to oil majors, especially IOC, to lighten their burden of under-recoveries on account of their inability to raise product prices in the domestic market, in line with international crude oil prices.

The 11-member OPEC will offer its spare production capacity of 2 million barrels a day in world oil markets from October 1, for 3 months in order to reassure consumer countries about energy supply security. The pact leaves the group’s official output limit unchanged at 28 million barrels a day since it is claimed that global refining capacity is at full stretch and unable to process more crude.

 Cement

As per figures by Cement Manufacturers’ Association, for the period April-August 2005 cement production and consumption in the four southern states have risen by 15 per cent and 19 per cent respectively as against the national average of 10 per cent and 9 per cent respectively, on the back of increased construction activity. Andhra Pradesh leads the pack with a 33 per cent growth in consumption mainly due to infrastructure projects, while the housing sector boom drove the 12 per cent growth in Karnataka. It is pointed that this could be the result of a low base in the previous year.

 INFLATION

 The annual point-to-point inflation rate based on wholesale price index has gone up to 3.53 per cent during the week ended September 10, 2005 from 3.16 per cent registered during the previous week. The inflation rate was at 8.15 per cent in the corresponding week last year.

 The WPI in the week under review has risen by 0.4 per cent to 196.4 from the previous week’s level of 195.7 (Base: 1993-94=100). The index of primary articles’ group has increased by 0.4 per cent to 195.4 from the previous week’s level of 194.7, due to a considerable increase in the price indices of food articles. The higher prices of food articles have been evident due to the higher prices of fruits and vegetables, eggs, fish- marine, fish-inland, ragi and gram. The index of fuel, power, light and lubricants group has also risen substantially by 1.8 per cent to 313.9 from the previous week’s level of 308.3, mainly due to higher prices of petrol rising by 8 per cent and high speed diesel oil and light diesel oil prices rising by 7 per cent each. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has declined by 0.2 per cent to 170.6 from 170.9 of the previous week’s level, primarily due to decline in the index of textiles by 1.4 per cent.

 The latest final index of WPI for the week ended July 16, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 194.9 and 4.45 per cent instead of the provisional levels of 194.4 and 4.18 per cent, respectively.

 The inflation rate has started moving up due to the fading impact of high base effect. The recent hike in the prices of petroleum products by the government, which has been effective from September 6th, and its consequent spiralling effects on the related sectors like transport, has also been instrumental in stimulating inflationary pressures on the economy.

 BANKING

 British financial services company Dawnay Day is launching a complete suit of wealth management services in India . Its India subsidiary Dawnay Day AV Financial Services (DDAV) is recruiting about 75 relationship managers and DDAV’s stock broking arm is in the process of opening 20 branches in the metropolitan cities. DDAV also plans to set up a non-banking finance company (NBFC) for lending and borrowing purposes. DDAV will target customers with net worth of over Rs.1 crore for its wealth management services and those with net worth of over Rs.10 lakh for its portfolio management services. It will also establish a web-based trading platform. The relationship managers and DDAV Securities’ branches will be based in New Delhi , Mumbai, Bangalore , Chennai and Ludhiana .

 PUBLIC FINANCE

 In an attempt to improve transparency in government finances, the Finance ministry is planning to introduce some new elements in the budget papers. The ministry is working on a detailed reckoning of the Centre’s assets that will become a part of the budget papers. In addition, a proposal to disclose the break-up of tax and non-tax arrears along with a statement on the guarantees extended by the government has also been made. Further capex purchases of over Rs. 2 lakh and above is also likely to be included.

 The income tax collections rose marginally by 4.5 per cent to Rs. 16,311 crore, during April-September 15. While, the direct tax collections rose by 26 per cent to Rs. 34,300 crore during the same period. Corporate tax collections touched Rs. 18,000 crore up to the said period, as compared to Rs. 11,600 crore in the corresponding period in the previous year, an increase of nearly 55 per cent.

The Planning Commission has set up a committee to take a look at the relationship between research, entrepreneurship and financial markets. The committee, to be chaired by Mr. Nitin Desai, will also examine the policy environment for venture capital and make recommendations, which will led to the basic industrial research and development being converted into new ventures. The committee will submit a report by December 31.

FINANCIAL  MARKET

Financial Market Developments

Capital Markets

Primary Market

The amendments to Sebi’s DIP guidelines to include changes in the book building process such as allocation of 5 per cent of the issue to mutual funds, 10 per cent margin applicable for all the bids tendered by the QIBs and others are to be applicable to all the public issues through book-building process whose draft offer’s are filed with Sebi on or after September 19.

AURIONPRO Solutions is tapping the market to raise Rs 10.5 crore by issuing 30 lakh equity shares of Rs 10 each in a price band of Rs 81-90. 

Secondary Market

The markets snapped the gaining spree of three week`s and lost 158.37 points this week on the BSE to close at 8222.59. The markets rallied on Monday and Tuesday gaining 63.88 points and 55.44 points respectively. On Wednesday the Sensex lost 239.28 points intraday but recovered towards the close. On Thursday the index witnessed sharp correction and lost 265.50 points on TV reports that Income tax officers raided stock and real estate brokers for possible violation of rules. However, after the Finance Minister said that the volatility in the stock market in the last few weeks was not a result of any scam, buoyed the market sentiments. 

Almost 852 shares accounting for 33 per cent of the traded stocks declined to one-month low level on Thursday as the BSE sensex posted the biggest single day fall after May 17, 2004.

Among the sectoral indices of BSE, except BSE FMC, all other indices have fallen during the week. While BSE sensex fell by 1.89 per cent, BSE small cap fell by a whooping 11.19 per cent and BSE mid-cap by 6.54 per cent.  

 A Business Standard study shows that trading volume of 60 penny stocks have jumped from around 100 –1000 shares a day in 2004 to over 10,000 – 15,000 shares a day in last four months (June – September), while their prices have jumped by 500 to 3,100 per cent during the same period. Also, their stellar performance has been matched by decent corporate results. 

 Crude oil prices eased below $66/bbl on Friday as Hurricane Rita lost some intensity and hopes built that Texas refineries would escape catastrophic damage. Crude oil had jumped to $68/bbl on Thursday when hurricane Rita had hit the coast of Texas .

With the aim to reduce the high volatility in the bull market, the stock exchanges have decided to apply circuit filters on derivatives from September 22.  Even the Clearing Corporation has made it mandatory for investors to pay 100 per cent upfront margin rates (VaR margin + Exterem Loss Margin) for 30 scrips from September 26.

Federal reserve hiked interest rates by a quarter-percentage point to 3.75 per cent for the 11th consecutive time.

 During the period between September 1 and 23, the FIIs have been net buyers of equities to the extent of Rs 4570 crore with purchases of Rs 19542 crore and sales of Rs14972 crore. Mutual Funds have also been net buyers of equities during the said period of Rs 2092.45 crore with purchases of Rs 6987.09 crore and sales of Rs 4894.64 crore.

 As per a study by Economic Times, FII investments in penny stocks has varied over the years and their investments continue to remain largely miniscule.    

The journey of BSE sensex from 8000 points to 8500 points has been the fastest ever rally which has happened in just 8 days. However, the addition to the market capitalization has been the lowest at 1.08 lakh crore.

 Derivatives                                  

National Securities Clearing Corporation (NSCCL) has disallowed banks with immediate effect from issuing guarantees on the basis of any arrangement with or counter-guarantees of other banks. NSCCL sets guarantee limits for banks based on the balance sheet size of the respective banks. The trend among large banks was to misuse smaller banks in the old private sector to provide serives to the brokers. The other set of banks affected by NSCCL’s regulation are smaller private sector banks active in stock markets.

Sebi is planning to remove restrictions on derivatives trading and is considering allowing investors to short sell the shares.

 Government Securities Market

 Primary Market

As per the indicative calendar for dated securities issuances, the government is to borrow Rs 58,000 crore between October 1 and March 31, 2006.  In addition, the government is to mop up Rs 32,500 crore in the third quarter under MSS.

Secondary Market

Incidentally, the RBI has announced that there would not be outright trading on Saturday with effect from October 8. All the trades executed on Friday for T+1 settlement will be settled on Monday and in case if Monday is holiday then the next subsequent working day.

The call money rates during the week ruled higher due to outflows on account of advance tax payments. Also, the subscriptions under the reverse repo have fallen sharply from around Rs 40,000 crore per day to around Rs 14,000 crore.

 As the international crude oil prices eased, the yields eased during the week but as domestic inflation rate hardened the yields have hardened. The weighted average YTM on 8.07 per cent 2017 has risen from 7.12 per cent on September 16 to 7.15 per cent on September 23.  

Bond Market

IDFC and Canara Bank have tapped the market during the week to mobilise an aggregate amount of Rs 750 crore.

 Foreign Exchange Market

The concern over the impact of Hurricane Rita on international crude oil prices  led to the depreciation of the rupee against the dollar from Rs 43.87 on September 16 to Rs 43.93 on September 23. During the same period, the rupee has appreciated against the euro, yen and pound sterling.   

Commodities Futures derivatives

The gap between spot and futures prices of black peper has widened to Rs 300 per quintal due to the fact that the amount of peper stock held in CWC’s warehouses are more than one year old, the corporation has declined to further renew the warehouse receipts for that stock. The compulsion of making physical delivery of that amount within next three weeks has put pressure in the futures markets, which are now desperate to carry forward the October futures contract for another 3-4 months.     

 NCDEX has dismissed the rumors that the pulses with the exchange are of inferior quality and that they were not fit for delivery in September as the stocks were of those harvested in December – January (2005) and of February – March shipment. The exchange has said that they have not allowed old crop after April contract. Thus, the idea that old crop is being used for September delivery is not true.

The market sentiments in commodities market has been weak as the pattern of rainfall has been irregular and there is expectation that there would be crop damage either due to excess rainfall or vice-versa.

 According to Assocham, trading in commodities has risen by 341 per cent in financial year 2005 to Rs 5.71 trillion as compared to previous year. It is expected to double its size within the next five years.

INSURANCE

 The Life Insurance Corporation of India (LIC) has identified Australia , New Zealand and Egypt for expanding its overseas services operations, armed with the Rs.270 crore corpus the government has provided for foreign forays.

 The Insurance Regulatory and Development Authority (Irda) has allowed LIC another two years to meet its required solvency margin (RSM). Insurance companies are required to maintain a 150 per cent RSM on a continuous basis on the risks it underwrites. LIC has reached RSM of 130 per cent based on the risks it underwrote till March 31, 2005. LIC also has another issue to tackle as it mobilises the solvency margin, it had to pay income tax of around Rs.3,500 crore against the amount that was set aside for meeting the solvency margin. The income tax department has said the amount provided for solvency margin cannot be treated as an expense.

 CREDIT  RATINGS

 Icra has assigned an ‘LAA+’ rating to a fresh Rs. 2 billion non-convertible debentures programme of Gruh Finance Limited (GFL). The ‘MAA+’ rating assigned to its fixed deposit programme has also been reaffirmed. These  ratings take into account GFL’s strong parentage, its established retail network in the semi urban and rural areas of Western India , the consolidation in its asset quality and its diversified funding profile.

 Icra has retained the medium term rating assigned to the fixed deposit programme of Transport Corporation of India Limited (TCI) at ‘ MA+ ’. The agency has also assigned an ‘A1+’ rating to the Rs. 400 million commercial paper programme (enhanced from Rs. 350 million) of TCI. The reaffirmation of rating takes into account TCI’s continuing strong position in the organised segment of the road transportation industry and its adequate debt protection measures.

 In an another exercise, Icra has withdrawn the ‘LA’ rating assigned to the long-term bond programme of Steel Authority of India Limited, as the instrument has been fully redeemed.

 Care has assigned ‘A’ rating to the proposed non-convertible issue of Shah Alloys Limited (SAL) for an amount of Rs. 100 crore. The rating takes into account SAL’s established market position in domestic stainless steel industry, good track record and improved financial profile.

 Care has downgraded the rating assigned to the Rs. 1,484 crore non-convertible issue of The Mysore Sugar Company Limited (MSCL) from ‘C (SO)’ with credit watch to ‘D (SO)’. The downgradation takes into account the non-payment of interest to debentures holders as well as the noninvocation of guarantee by the trustees.

 Crisil has assigned ‘P1+’ rating to the Rs. 3 billion short-term debt programme (enhanced from Rs. 1.5 billion) of Indiabulls Financial Services Limited. The rating takes into account the company's high absolute net worth levels and its strong market position in the retail equity broking segment.

 Crisil has reaffirmed the ‘AAA (SO)’ rating assigned to the pass through certificates issued under the securitisation programme of Mahindra and Mahindra Financial Services Limited. The agency has also reaffirmed the ‘AAA/Stable’ rating assigned to the Rs. 880 million non-convertible debenture issue of Citicorp Maruti Finance Limited.

 Fitch has assigned AAA ( ind ) rating to the HDFC Bank Limited’s Rs. 10 billion subordinated debt programme. At the same time, the agency has also assigned the bank’s Rs. 30 billion certificate of deposits programme a rating of ‘F1+’ and has affirmed the bank’s existing Rs. 4 billion subordinate debt at ‘ AAA (ind)’.

 CORPORTE SECTOR

 Eveready is planning to acquire BPL’s battery business, BPL Soft for Rs 67 crore. Currently Eveready has a 47 per cent share in the batteries market, the deal is expected to scale up its share to 56 per cent.

 The Indian farmers fertilisers cooperative has acquired Oswal’s fertiliser unit at Paradip in Orissa for Rs 2,180 crore. This unit has two million tonne capacity to produce diammonium phosphate (DAP), complex fertiliser and phosphoric acid.

 Bharat Forge limited has acquired 100 per cent ownership interest in Imatra Kilsta AB, Sweden along with its wholly owned subsidiary Scottish Stampings limited, Scotland . Imatra is one of the world’s leading forging group, the largest manufacturer of front axle beams.

 Larson and Toubro, and the United Arab Emirates based Dubai Aluminium Company limited have jointly presented the proposal to the Orissa government to set up an integrated aluminium complex with an investment of approximately Rs 15,000 crore.

 Tata Motors has signed a memorandum of understanding with Fiat SpA, Italy to jointly develop, manufacture and distribute produces and components in the passenger car segment.

 Bharti Tele-Ventures limited will be investing Rs 250 crore in 2005-06 to expand the Airtel network in Maharashtra and Goa for. The company has already invested Rs 120 crore so far and will make additional investment in Maharashtra and Goa .

  Tyre major Ceat is planning to raise Rs 53 crore through rights issue in the ratio of 3 shares for every 10 shares held. Ceat has also decided to merge all its three wholly owned subsidiary companies with itself.

 Rajesh exports has got an order of Rs 12.4 crore of 22 carat jewellery from Singapore based jewellery manufacturer, Gold Star Jewellery. The order will be executed at the company’s manufacturing factory in Banglore.

 Hindustan Petroleum Corporation Limited (HPCL) has decided to acquire 67 per cent shares in Kenya Petroleum Refinery Limited (KPRL) in a deal valued at around Rs 2,200 crore. Mombassa based KPRL has a refinery with a capacity of 80,000 barrels per day. It supplies refined products to the Kenyan market.

 McDowell and company, the flagship firm of the UB group will merge eight firms of the group with itself. The firm to be merged are Phipson Distillery, United Spirits Limited, Herbertsons, Triumph Distillers and Vintners, McDowell International Brands, Shaw Wallace Distilleries, Baramati Grape Industries and United Distillers India Limited.

 Mumbai based Advanced Enzyme Technologies Limited (AETL), the country’s second largest natural enzyme manufacturers is planning to set up a base in China by acquiring minority stocks in two Chinese technology companies. AETL has assigned an investment of Rs 10 crore for the acquisition.

 LABOUR

According to the report released by the International Labour Organisation (ILO) titled ‘Labour and Social Trends in Asia and the Pacific 2005’, the employment in Asia Pacific region between 2003 and 2004 has increased by only 1.6 per cent as against the backdrop of a strong economic growth rate of over 7 per cent. The ILO emphasised that the robust growth rate in this region has not accompanied adequate creation of jobs. The number of total unemployed edged up by half a million to touch 78 million. In addition to this, there is widespread underemployment in this region in many forms; millions are working for less than full time or are taking jobs below their qualifications or skills. A disturbing trend brought out by the study is that the young people aged between 15 to 24 are bearing the brunt of this employment deficit accounting for a disproportionate 49.1 per cent of the total jobless in this region, although they make up only 20.8 per cent of the labour force. Moreover, the ILO has pointed out that youth unemployment has ironically co-existed with child labour in this region. Finally, according to ILO estimates, halving youth unemployment would increase GDP by up to 2.5 per cent in East Asia, by up to 6.7 per cent in South Asia and up to 7.4 per cent in Southeast Asia .

The Pension Fund Regulatory and Development Authority (PFRDA) might consider insurance cover for pension funds in line with the structure prevailing in the United States . According to the chairman of PFRDA, insuring certain amount of pension funds is one of the options to minimise risk, as fund managers would be investing in equities. He added that investors would have to bear high burden of premium if it is introduced initially before the pension fund market matures. However, over the time and with expanding investor base, this could be a viable option.  

SOCIAL SECTOR

Education

The government has announced free education for every single girl child from class VI to XII from the current financial year in a Central Board for Secondary Education (CBSE) school. If there are only two girls in a family, both will be entitled to 50 per cent fee concession. In addition to this, it has also planned scholarships for girls at both under-graduate and post-graduate levels.  The University Grants Commission (UGC) will allot scholarships of Rs. 2000 per month to 2400 girls to pursue post-graduate education in any recognised institution. In addition to this, the Central Board for Secondary Education would offer 550 scholarships to girls based on class XII results, for pursuing under-graduate education in non-medical and non-engineering courses in recognised colleges. The scheme would apply to all government-aided or affiliated schools or colleges in the country.

 EXTERNAL SECTOR

 Exports of power equipment and components from India are set to grow at more than 20 per cent with MNCs like Siemens, ABB, Alstom and GE, who are facing intense competition from low cost manufactures in the international market, planning to outsource these products from their Indian subsidiaries. Currently, the $10 billion Indian electrical equipment industry exports electrical equipment, primarily in the transmission and distribution segment to the tune of $1 billion. The products consigned for exports to the emerging markets like Malaysia , Thailand , Brazil , Argentina and the Middle East , comprise switchgears, transmission towers and transformers.

 With the Indian textile sector falling short by a huge margin of the required investment target set by the ministry of textiles, the ministry is now seeking foreign investments from countries like the US, Japan, Italy, Turkey and Indonesia. While the textile ministry had envisaged Rs 40000 crore of investment every year for the next five years, to make the industry industrially competitive in the post quota regime, it has been able to attract investments only to the tune of Rs 20000 crore in the last one year (2004-05).

  Thailand is looking at doubling bilateral trade with India in the next two years to $4 billion and is banking on pharmaceuticals, raw materials and software contents as key drivers. Thailand is also projecting itself as an investment destination for Indian companies and is urging hospitality majors like Tatas, Oberoi and Leela to set up shop in the country.

 Formal trade figures between India and Pakistan have, for the first time, overtaken informal bilateral trade figures between the two countries. Trade through formal channels stood at $800 million during 2004-05.

 The government is likely to raise the ceiling on foreign direct investment, now at 20 per cent, for direct-to-home (DTH) ventures. The current policy permits a total foreign investment of 49 per cent in DTH companies, of which FDI can only be up to 20 per cent. The rest can be held by non-resident Indians, overseas corporate bodies and foreign institutional investors.

 The government expects investment worth Rs 50000 crore in special economic zones, which would help generate 100000 additional jobs.

 The textile ministry is considering a plan to develop 20 new handicrafts clusters and six handicrafts park within the next 2-5 years. This will increase the number of handicraft clusters to 26 within the next five years and boost India ’s share of global handicraft export to 4 per cent at $9.1 billion by 2009-10. The world market for handicrafts is estimated at $235 billion, while India ’s export stands only at $2.98 billion.

 Government has approved Rs 675 crore Special Economic Zone by Finnish telecom major Nokia near Chennai.

 Government of India proposes to put in place the special economic zone rules by middle of October.

INFORMATION TECHNOLOGY

  Russia ’s National Depository Center (NDC) has signed an MoU with TCS to customize and implement its eClearSettle for depository, clearing and settlement services. The NDC is participating in establishing a Central Securities Depository.

 TELECOM

 State-owned telephony majors Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL) have embarked on a hiring spree and are recruiting a total of 3,400 staff this year. This is one of the largest recruitments in the telecom sector. The move also gains importance as the sector is going through a lull phase, with the private sector suspending recruitment for the time being. BSNL is recruiting 3,000 junior telecom officers (JTOs) and MTNL is planning to recruit 400 E-II grade, which comprises JTOs, chartered accountants and other officials.

 Reliance Infocomm has paid Rs.130 crore to BSNL as part of its last payment due to the PSU on account of the former’s alleged re-routing of international calls. With this, the BSNL has recovered the entire amount due on access deficit charges from Reliance Infocomm in the call re-routing case.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

LIST OF WEEKLY THEMES

We will be grateful if you could kindly send us your feed back at epwrf@vsnl.com